Use the Information for the Question(s)below

question 56

Multiple Choice

Use the information for the question(s) below.
Consider two firms,Chihuahua Corporation and Bernard Industries that are each expected to pay the same $1.5 million dividend every year in perpetuity.Chihuahua Corporation is riskier and has an equity cost of capital of 15%.Bernard Industries is not as shaky as Chihuahua,so Bernard has an equity cost of capital of only 10%.Assume that the market portfolio is not efficient.Both stocks have the same beta and an expected return of 12%.
-The alpha for Chihuahua is closest to:

• A)+2%.
• B)-5%.
• C)-3%.
• D)+3%.

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Definitions:

Tax Advantages

Financial benefits conferred by tax laws to encourage certain activities or investments.

Biodiversity Rating

A quantification or evaluation of the diversity of plant and animal life in a particular habitat or ecosystem.

Global Annual Catch

The total quantity of fish and other aquatic animals captured worldwide in a year, often used to assess the sustainability of fishing practices.